April 27, 2006

Wall Street is becoming skeptical about the housing bubble. “Centex shares headed for the cellar, dropping 9% in midday trading, after the Dallas-based home builder missed quarterly earnings estimates, lowered guidance and announced it was walking away from land deals in some markets. The warning offered clear evidence that rising interest rates are pulling the choke chain on the housing market.”

“Management also slammed the door on robust growth for 2007, slashing earnings forecasts. Orders fell 11% year over year for the March quarter, an important precursor to actual revenue that gets booked three to six months later when home sales close.”

“A $28 million charge stemed primarily from the forfeiture of land option deposits in the Washington, D.C., San Diego and Sacramento, Calif., areas. The land options writedown is a big deal, says analyst Stephen East. ‘I think what’s significant is the signaling effect of it. This is the first big builder that said, ‘When we promised to buy some land we had some assumptions about what we thought we could get for the land when we put a house on it, and that’s no longer the case,’ he said.”

“Pulte Homes Inc. CEO Richard Dugas warned that the company’s second quarter would likely come up short. Hardest hit are markets that experienced huge price increases over the past two years. Dugas said markets such as Sacramento, San Diego and Northern Virginia, appear to be in the midst of a material correction where house prices are falling, cancellations are surging, traffic is slowing and incentives are up.”

“‘Your first quarter came in light and it looks like your second quarter is going to be light relative to our expectations. So, it’s just not clear why you would be re-affirming the guidance,’ said analyst Margaret Whelan, during the conference call. ‘It seems like we’re going to be disappointed later in the year, she said.”

“Beazer Homes also reported double-digit declines in home orders as rising mortgage rates and housing prices pressured buyers. ‘This whole space, I thought it was bottoming out,’ said portfolio manager Keith Gangl. ‘Maybe it will take a little longer.’”

“Orders for homes, which are not reflected in the revenue, fell 19.4 percent to 4,224, and were off 46.3 percent in the West. Sacramento, California, was particularly hard hit, as orders fell and cancellation rates rose.”

And Holden Lewis reports on efforts to keep the bubble going. “The Methuselah of mortgages has arrived: the 50-year home loan. Statewide Bancorp of Rancho Cucamonga began offering the loan in late March, to California residents. Advertisements have yielded a lot of phone calls and ‘quite a few applications,’ says VP Alex Diaz Jr.”

“‘There are two markets for this,’ Diaz says. ‘One is if they’re looking to purchase a home, because of how expensive housing is. And the other is payment-option ARMs, borrowers are making minimum payments and they’re starting to panic a little bit and look for vehicles to get out of these loans.’”

“Bystanders are dubious of the half-century loan’s benefits. ‘If you run the amortization out, it basically is an interest-only loan, in all practical terms,’ says Jason Flurry, a certified financial planner. ‘If a person is considering something like that, they’re probably trying to squeeze into too much house to begin with.’”

“But just about everyone in California is trying to buy too much house. Of the houses sold in the state in February, half cost more than $535,470.”

Excellent point JWM! And you have nailed the problem because 500k does not buy much house here in Orange County or it buys just enough house in a very bad area. I guess we are just supposed to reduce our expectations of what enough is. Is it safe enough? Is it structurally sound enough? I can understand how it may seem like buyers are trying to buy too much house given all of the McMansions we see. But the flip side is that the prices have gotten too high and those who succumb to the pressure to buy are venturing further and further into very high risk loans to buy what they feel they need. The lenders do not care, they’ll get there percentage. The agents do not care. They’ll get their commission. In fact if these buyers default the lenders and agents get to process the property one more time. Someone will be stuck with a bad loan and the buyers will be broken financially. The newest 40 and 50 year mortgages are just another attempt to keep this ponzi scheme alive no matter who it hurts.

Since the early seventies, our economic expansions have really been credit bubbles in disguise, and they have been paid for by inflating the money supply. The net result each time has been a reduction in the middle class standard of living. In the sixties, the family could easily make due on one income; do the math today…dual incomes aren’t enough now. And look around: many communities now have to have local tax levies for fire and police services because the general budgets have been exhausted by the “diversity” who would rather spend the day “chilling” with friends than working for “chump change” that illegal aliens gladly accept and mail home. Whoever coined that “boiling frog” syndrome sure nailed it!

‘This is the first big builder that said, ‘When we promised to buy some land we had some assumptions about what we thought we could get for the land when we put a house on it, and that’s no longer the case,’ he said.’

Housing bubble myths dashed daily. If Centex lost $20+ million just on an optioned land writedown, imagine what the write offs will be for the $7.5 billion in inventory AND $9 billion in ‘long term investments.’ The firm has $880 million in cash, $13 billion in long term debt and $2.3 billion in accounts payable. And what will they do if Wall Street slows their funding? Sell the only thing they have; land and houses, putting even more inventory on the market.

OT —
Northern VA radio full of mortgage/RE ads. Today heard three people in a row proclaim “I broke my ARM and it feels great!” Advertising for fixed rate loans. It won’t feel so great if the ARM’s don’t qualify.

I’m assuming Centex is going forward with a large housing development in Jeffersonton, VA today. I had to wait for the big trucks. My agent called a few days ago and proclaimed that the big local builders (Ryan especially) were now undercutting resales in price and not just options.

Banks make money on the steepness of the yield curve, which increased today. They also make money in increasing credit card rates and by ripping off old people (adding fees, etc. that oldsters don’t notice). There are about 74,000 new old people since I started typing this message. Banks won’t get hurt, the holders of MBS and reinsurance industries will get hurt, but there will be some sort of taxpayer bailout ala S&L scandal eventually.

Because people are idiots. I’ve read the investor message boards for some of the leading home lenders and most “investors” have no idea that the banks they own are holding billions of dollars in high-risk mortgages. They assume that the banks have sold these junk bonds off to some other bagholder. Like they say in poker, if you look around the table and can’t tell who the mark is, it’s you.

They assume that the banks have sold these junk bonds off to some other bagholder.

Well, technically –for many banks– this is true. FCBs (mostly asian), big pension funds and other large institutional investors probably hold a lot more of these toxic loans than the banks/S&Ls do. Can thank the “magic” of Fannie/Freddie and MBS/CMOs for that.

Common misperception. Banks like WaMu are holding tens of billions in “loans held in portfolio” on their balance sheets. It’s true that they’ve sold quite a bit of junk to Asian central banks and hedge funds, but they’re sitting on a powder key themselves. According to WaMu’s 10-K, they hold more than eighty billion in Option ARMs in their portfolio:

The Company’s loans held in portfolio increased $22.56 billion to $229.63 billion at December 31,
2005 from $207.07 billion at December 31, 2004. The increase was substantially due to the addition of the
credit card portfolio from the Card Services Group and an increase in total home loan and home equity
loans and lines of credit balances. Primarily all of the growth in the home loan and home equity loan and
line of credit portfolios resulted from the origination of short-term adjustable-rate products. The
Company’s short-term adjustable-rate home loans, which were predominantly comprised of Option ARM
loans, increased from $75.38 billion at December 31, 2004 to $84.86 billion at December 31, 2005.

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Comment by Tulkinghorn

2006-04-27 16:22:42

This is reminding me of Lucent… all the profits for the last three years will have goon poof.

Comment by bluto

2006-04-27 17:33:30

WaMu and Wells Fargo (really NorWest) have long been banks that activly tried not to securitze at least a portion of their mortgages. For a long time, the option inherent in a mortgage was very expensive (meaning people were paying a very dear price for the right to refinance their mortgage without a penalty). Banks that could manage the prepayment risk (early adopters to the derivative markets, generally) mint money. Swaptions were exceedingly cheap relative to the mortgage call. Most banks don’t hang on to their mortgage loans, because of the prepayment risk (the thrifts that did generally all went out of business in the 80s–except WaMu and a few other surviving thrifts).

Comment by John in VA

2006-04-27 18:00:29

I think that WaMu is hanging on to this paper because they can’t sell it all profitably (FNM won’t buy it). Their 10-K states that they sell off “substantially all” of their 15- and 30-year fixed loans. Why would they hang on to only the risky paper?

Visalia to Redding (with Sacramento at the center) is seeing massive inventory spikes and plunging sales. The investor stream out of LA and the Bay Area are long gone, and those with housing to sell are finding local incomes and local demand about 1/2 required for these prices. Centex has held a few ‘12-hour’ sales, but their impact was laughable. Taking $50,000 off of a $700,000 price tag doesn’t cut much ice when the average household income averages 40 to 50K. Every night, I drive by row after row of new housing, some of it 6-8 months old now, and very, very few have lights on. Entire dark blocks of expensive investment waiting for buyers that don’t exist anymore, and in a true market honestly never did.

I used to think it would take years, but now I think that the media will begin to tear into this because it’s a good story. They will begin to really get into it when they can replace all of the real estate advertising revenues that they’ll slowly begin to lose.

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Comment by Ted

2006-04-27 17:29:59

The media is waiting until closer to election time. The real doom & gloom won’t hit the front pages until 2007 for the when the media’s campaign for the Democrats begins.

Comment by KennyBabes

2006-04-28 07:22:25

The corporate media supports Dems??? Thank god breathing is involuntary because if you had to think about it you would be dead.

The idiot Wesley Hoaglund, pres of Lennox Financial is still pitching his co loans and the biggest no brainer on the radio. Another fool co still saying reduce your payments by 35%, etc.

I would like a pepperoni/sausage pizza with my $500K I/O neg am, 10 yr deferred payment, with written guarantee that my home will appreciate at least 20%/yr, or you will buy it at that price in 10yrs - loan. Can’t lose, ran the numbers. WOW

I don’t know who the pizza idiot is. I have heard that though. But they are in the same league. Peddling toxic mortgages as being a wise financial move for the illiterate, uninformed and the idiot sheeple. He is just the most annoying one that I can name.

I don’t know who the pizza idiot is. I have heard that though. But they are in the same league. Peddling toxic mortgages as being a wise financial move for the illiterate, uninformed and the idiot sheeple. He is just the most annoying one that I can name. Ciao

Again what lawsuit on what basis. Please someone give me one rational reason why someone should be sued in this debacle. Sheeple got greedy didn’t think, didn’t research, lost their asses. Who’s fault is that I would say sheeple. Accountability people sheesh

I’d have to agree with you. People shop for loans, and typically go with who can get them the lowest monthly payment. It’s not up to the broker to decide if it’s in the best interest of the borrower, it’s up to the borrower to decide. I know there are plenty of banks out there who would lend me a million bucks to go out and buy a home. They would say I qualify. I say I don’t. Just because my credit card company grants me credit doesn’t mean I have to run out and charge away.
The word is out about I/O and “pick a payment” loans. People ask for these products. I had a couple the other day that were mad because they thought their 2nd was going to be I/O and it was fully amortized. We had to get the docs redrawn for an I/O so that they could save $60 a month. SIXTY freakin’ dollars!! Heaven forbid anyone pay down principal. But they wanted I/O.

I would agree as well, sue for what? This time. But I am convinced that there will be oversight on this madness after this debacle is combed over by sub-committees. No longer will you be able to show up with a pulse, a so-so FICA score and stated income and walk out with a half a million dollar 100% loan. The days of mandatory down payments, proof of income and good credit will return. To protect idiots from themselves and to redirect the ticking time bomb products the lending industry has propagated to the masses back to where they were originally created for.

Your desire and willingness to ensnare yourself in a deadly loan even with full knowledge of it’s character and for whatever reason will not be enough to procure it as in NASD Rule 2310 (the unsuitability clause). Your quota and your willingness to get someone into that loan they are not qualified for will not be allowed either.

The brokers, home buyers, realtors, banks, appraisers, home builders and government have been left to their own devices and they have gravitated to the lowest common denominator of greed, a quick buck and short sided “what’s in it for me NOW” impulses and practices. But when there’s mania and money to be made, which side of the velvet rope do you want to be on?

Everybody is to blame.

Mom can tell you until she’s blue in the face not to run with scissors, but until there’s blood on the carpet, it’s sure seems harmless enough.

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Comment by Rainman18

2006-04-27 19:41:07

But wait until your Father gets home and lays down the law…

Comment by bottomfisherman

2006-04-27 20:24:00

In some smoky backroom in the capital, plans are being hatched for a gvt RE bailout…

Also, OT, but $100 per motorist to offset high gas prices and drill in ANWR is a completly stupid idea.

Comment by Rainman18

2006-04-27 20:33:02

Maybe, maybe not. Irregardless, regulation and oversight will be hatched with or without a bailout…

Sued for Truth in Lending violations, REPSA and, here in California, Unfair business practice Acts (17200) claims. I have seen a TON of clients who were not fully informed of the Risks and Alternatives to the loan products they were given. How on earth can a commoner be held to the same knowlege, expertise and training as one of these sleezy mortgage brokers? In San Diego we have an entire industry that preys on people who fall behind on their mtgs. They come in and lend hard money at high interest rates with the knowledge that, if they fell behind without an additional loan, they DEFINITELY will fall behind with a usurious 2d or third mtg. They will then be able to aggressively foreclose and get the house. I am looking forward to these weasels getting back houses that are absolutely upside down. I hope they gag on the garage. . .

have to agree. A licensed stock broker could never make the claims that Realtors and Mortgage Brokers do with such impunity. It’s been said here before, the public in general doens’t understand how stocks work, how bonds work, time value of money principles, and how risk capital investment works in business. What they understand is where they live…and if it happens to appreciate tremendously, why wouldn’t they want to “invest” in it? The problem lies in understanding risk management on even a basic level. The risks are not being adequately explained the average I/O and Neg Am home-buyer…can’t be or they wouldn’t get themselves into such a mess. Specific falsehoods ARE being perpetuated by the RE industry pros: house prices in SoCal never go down, interest rates won’t go too high, not making more land, don’t get priced out…on and on.

Oh come on you 2 are stretching. BKlawyer if your truly a lawyer if someone comes into your office spouting that nonsense that they were uninformed your bs meter should be redlining. Those same people who are in your office crying wolf are the same people who come into my office saying I want my payment at xyz and I don’t care how you do it and if you can’t do it I will find somebody who will.

Again BKlawyer if your a bankruptcy lawyer please and I reinterate please don’t call mortgage brokers sleazy. Your profession tops the mortgage broker proffession in sleaziness by miles. During the last downturn I met more than my share of your types waiting in driveways or pushing your way into a borrowers home and pulling them into a dark corner whispering sweet nothings in their ear all the while demanding fee’s up front from a borrower who 3-6 mo’s down the hole and when he should be saving up deposit money for a rental he’s scraping cigarette money out the ashtray because the “lawyer” is going to save him and his home while in truth creating pure havoc on the borrowers life. I can’t tell you how many times I have been on the doorsteps with a sherriff to evict someone out there home and they start waving some worthless BK papers a lawyer had them sign only to find out that toilet paper had more value in saving them from loosing their home. Then when they try to get the lawyer on the phone to explain it to the sherriff they wind up being put on hold or being told the lawyer has left for the day after they have forked over large sums of money. Your industry makes mortgage brokers look like guardian angels.

Not only that, but what is the probably of your home flucuating in value over the next 50 years while you pay it off? Pretty high, I should think. Why buy at the top of the market and pay for it over a period of 50 years?

Why not just call home ownership the new indentured servitude? These FBs’s will never pay them off, and instead just face a lifetime of debt. A lifetime of punishment all for the sake of painting the walls whatever color you want? Maybe in my next life, I’m all about enjoying this one.

Let’s say you breeze through college in 4 years, right after high school. And are “forward thinking” enough to purchase one of these 50 year loans and pay the minimum each month.

After paying on your “investment” virtually your entire adult life, you get to enjoy the security of having your home paid off for a grand total of…. 3 years! I understand no one anticipates being in a 50 year loan for the duration, but still. No one anticipates being under $100,000+ either, which could very well happen if you purchased last year at the top.

At least before this bubble nonsense, the same college “graduit” could expect to have his home paid off at 50 and enjoy their retirement years… no longer.

. . .

Sheeple have been brainwashed by RE propaganda, and could not see that they sold themselves into slavery with these exorbitant loans.

It’s surprising that the Benchmark Lending guys haven’t had any kind of raid…yet.

If you listen to their commercials, they’re screaming fraud in the middle of the day with their pants down. “Stated everything, income, assets, intentions, you name it!” “If I can’t get you into a loan, I’ll flip you off.”

This is the first big builder that said, ‘When we promised to buy some land we had some assumptions about what we thought we could get for the land when we put a house on it, and that’s no longer the case,’ he said.’

Ya doz bank stocks be puttin da hurt on da shorts. My XBD & BKS puts don’t feel too good either My head feels like it’s about to explode with all the pollen and airborne allergens floating around. Wonder if da Clownifornians spending their first summer in Big D (that’s “D” for “depresssing” are used to sniffling and sneezing 24/7?

Another trend that concerns me is the large number of people who refinance to the max, take the cash and put it down on an even bigger house (with a maximum loan amount.) They rent the original house, often at a large negative cash-flow. And the loans on both houses are often interest only, or lower negative-amortization-option ARMs. I usually cannot help these people because my conservative bank actually underwrites and does not do Option ARMs.
Here is an example: 800,000 house with 300,000 loan. Cash-out refinance new loan of 600,000. Buying 1,200,000 house with 900,000 loan. He went from debt of 300,000 to debt of 1,500,000, and negative cash flow on house of almost 1,000 per month not counting vacancies or maintenance. Both loans were interest-only. As long as prices rise, he wins. (I could not help him with his purchase loan.)

I think that people don’t realize, that’s not banking your winnings, it’s letting it ride. Or maybe they do realize and they’re just bigger gamblers than I am. I just don’t want to listen to them whine about how much money the lost or that they were up 200k. The only winnings that matter are the ones that you come home with.

Yep, it bears repeating, even if no new houses are sold, there will still be a lot of new mortgage activity due to foreclosures, people refinancing to fixed, &c. Look at CFC for example, it’s still basically at its all time high.

It’s the HELOC’s that have me worried. I think people don’t understand the portfolio risks inherent in these loans in the current environment. There are very restrictive rules about calling them and they are usually second or third liens. Many of them are variable rate, often I-O for 5-10 years, and now the monthly costs on those are escalating rapidly. The good credit risks will be able to refi into lower-cost loans or pay them off. The bad ones you keep until they get very bad. So the portfolio ages badly in this environment. Your 90% LTV’s can rapidly become 100% LTV’s.